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Daily Newsletter, Thursday, 09/25/2003

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Thursday 09-25-2003
Copyright 2003, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Rationalize This
Futures Markets: Gold Dojis, Treasuries Drift, Equities Sell
Index Trader Wrap: See Note
Market Sentiment: Bear Sightings on Wall Street.
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
09-25-2003 High Low Volume Advance/Decline
DJIA 9343.96 - 81.60 9458.49 9342.98 1.86 bln 1016/2170
NASDAQ 1817.20 - 26.50 1856.22 1817.20 1.98 bln 814/2393
S&P 100 502.62 - 2.84 508.96 502.61 Totals 1830/4563
S&P 500 1003.26 - 6.12 1015.97 1003.26
W5000 9726.36 - 81.30 9848.08 9726.22
RUS 2000 495.05 - 12.81 509.34 495.05
DJ TRANS 2697.12 - 48.80 2749.87 2697.12
VIX 22.26 + 1.04 22.27 21.04
VXN 30.65 + 1.29 30.72 29.16
Total Volume 4,202M
Total UpVol 910M
Total DnVol 3,202M
52wk Highs 298
52wk Lows 28
TRIN 1.20
NAZTRIN 1.71
PUT/CALL 0.84
************************************************************
Rationalize This
I wrote after the rebound on Tuesday that I was having trouble
rationalizing the market rally based on the historical calendar
trends but was prepared to tough it out if necessary. Finally,
a historical trend returned and we are staring at a serious
rationalization problem for the bulls. The shoe is now on
the other foot.
Dow Chart
Nasdaq Chart
There was not a flurry but a flood of economic reports today
and the general outlook was not exciting. The mixed picture
began with a throwaway Jobless Claims report. I say throwaway
because the analysts were quick to claim the hurricane wild
card as throwing the numbers into doubt. I agree with that
analysis. With ten states boarding up windows in advance and
cleaning up debris in the aftermath there was no way the new
Jobless Claims were going to be relative. This brings into
question the high number at 381,000 with more than ten states
closing up shop. What would it have been without the storm?
The aftermath cleanup and lack of power could keep the numbers
down for the next two weeks. If we do see a rebound over 400K
next week then we are in trouble because the non-storm numbers
would have been even higher. The bulls should have looked at
this number as a gift.
The Chicago Fed National Activity Index fell below zero once
again at -0.28 after peeking only slightly into positive
territory last month at +0.05. This was the lowest reading
since May at -0.34. The indicator is composed of 85 components
and 53 showed below average growth. 49 dropped between July
and August and of those that improved 14 still did not show
growth. If it were not for the housing market the nation
would be sinking in economic quicksand. Employment data
continues to pressure the recovery and there is no jobs
recovery in sight. This continues to pressure the
manufacturing sector and until this broad based sector
recovers we will continue to wander.
Also pointing to this continuing employment problem was the
Help Wanted Index, which fell to 37 and only 2 points away
from the current cycle low. If the HWI is a leading indicator
for hiring then the jobs picture is not looking up. Companies
are continuing to be pressed to cut costs and wages and very
high insurance and benefit rates are an easy target for
those cuts. Until demand begins to ramp up to the point
where the existing staff cannot handle it I do not expect
any gains in these numbers. In contrast to the HWI the Mass
Layoff numbers for August were significantly improved at
133,839 compared to 226,435 in July. This is a significant
improvement but still a large number of layoffs. This is the
lowest number since March at 113,026. It could have been
impacted by the blackout and by cyclical end of summer
vacations as well. The government layoffs were the highest
since the program began in 1995. I checked August of 2002
and that was also a multi month low which began to escalate
rapidly into the 225,000 peak in Jan-2003. The August-2003
number was also higher than the Aug-2002 level. Based on the
historical trend I do not put too much faith in the drop.
Proving the weak demand picture was the drop in Durable Goods
Orders by -0.9% in August. Shipments fell substantially more
at -2.9%. This was the first decrease since April. Were it
not for the jump of +2.9% in primary metals the drop would
have been even more substantial. Six of the seven components
fell with aircraft and motor vehicles falling by -6.6%.
Communications fell by -4.8% and computers -2.3%. Does this
look like we are rushing into the 4Q recovery?
The most positive events of the day were the jump in New Home
and Existing Home sales. New Home sales rose to 1.15 million
annualized and the second highest number on record. Existing
Home sales rose to 6.47 million, which was a new record. The
gain in these numbers is purely based on the bounce in rates.
As I have said before a bounce in rates after a period of
sustained lows always prompts a race to buy houses and lock
in the rates before they go higher. Everybody in America
understands that rates are going up very soon and they are
not going to wait around for 7% or higher to buy. Once the
rates really begin to rise the housing market may not die
but the rate of sales will slow significantly. The housing
market is the main supporter of the economy currently and
with consumer spending slowing we will continue to depend
on housing to keep it moving. It is up to the Fed to
understand this keep rates as low as possible for as long
as possible.
Friday we will get the final Q2 GDP revision and the consensus
is for it to be unchanged at +3.1%. The last revision surprised
to the upside from +2.9% to +3.1%. If the final revision goes
the other way and breaks back under 3.0% then the estimates
of +3.9% for the 3Q will be called into question. Remember,
after tax corporate profits fell by -3.4% in the 2Q GDP.
Spending rose +3.8% while profits fell. The 3Q GDP is going
to be a very important milestone for the markets.
The markets are expecting +19% earnings for the S&P in the
3Q according to First Call. For the last few days there has
been an increase in the rate of warnings and the market is
paying attention. 181 S&P companies have added or raised
their dividend since January. The markets have bought the
earnings expectations and the dividend increases since March.
Just like playing poker, once the last bet is placed it is
time to show the cards. It is time to see if the recovery
began to gain speed in the 3Q or was it just more cutting
costs and laying off workers that produced the earnings.
Federal Signal, FSS, cut estimates due to falling spending
by governments and private business. AO Smith, AOS, cut its
estimates by more than half. Darden Restaurants cut estimates
saying recent promotions had failed to attract additional
customers. Viacom, VIAb, cut estimates saying growth had
slowed and was not likely to reach prior forecasts. Other
companies warning today included AZZ, BSG, NEWP, PCIS, PHHM,
PSTA and TUP. Not all the news was bad with raised guidance
from BBY, CYBE, MKC, MUR and RAD. It was just the ratio of
warnings to upgrades that bothered investors.
BBY better get all the glory it can with its raised guidance
today because Dell went public with the new products
announcement. They are planning to offer flat screen TVs,
hand held computers and an online music service. They plan
on hitting the consumer market before the holidays and with
the Dell momentum it is due to be a big push. Dell said it
was conceivable that Dell could rise to the number one
position in home electronics very quickly. Whoa! Big claims
from Michael Dell and I am sure Gateway was paying rapt
attention. Still there are some big targets out there that
are ripe for the Dell marketing machine. Sony, Mitsubishi
and Panasonic are the top three and Michael Dell is walking
onto a field full of goliaths. This just happens to be where
he is most at home. Dell has slugged it out to Compaq,
Hewlett Packard and IBM and came out on top. The market was
controlled by these giants when he started just like Sony
and the others control the home electronics market today.
Dell also took aim at Apple with the entry into the music
business with the Dell Digital Jukebox and the Dell Music
Store. Going head to head with the Ipod, RNWK and ROXI. Go
get them Michael! Electronics retailers BBY and CC closed
down for the day but then who didn't?
Speaking of category killers Sony announced an entry into
the digital recorder business with a competitive product
to TIVO. The entry was expected eventually and the impact
to Tivo's business could be huge. The market has been
restricted to only a couple players in the field and the
margins have been high. Fortunately more competition will
knock those prices down to a reasonable level.
Not just a category killer but a category eliminator the
digital camera has knocked Eastman Kodak down for the
count. EK announced this morning that they were cutting
their dividend to 50 cents from $1.80 and said they were
no longer going to try and grow the film business. They
conceded that Fuji was winning the film battle and said
they were going to focus their energy on the digital
revolution after decades of being the leading film producer.
Another revolution is taking place at the NYSE. The lead
director and head of the compensation committee, Carl McCall,
announced his resignation and rumors are flying that there
are more resignations in the wings.
Unlike the earthquake on the NYSE there was a real 7.8-8.0
magnitude earthquake in northern Japan at 2:50 PM our time
today. This is a major quake and Tsunami warnings were in
effect for Japan, Russia, Guam, Mariana Islands and Wake
Island. Tsunami watches were in effect for Hawaii, Taiwan
and the Philippines. The earthquake occurred at 4:50 Japan
time and only a few hours before the Nikkei was scheduled
to begin trading. After trading down -192 points last night
and expected to trade down again on our loss the earthquake
could accelerate this drop.
The markets today were ugly. They did not start out that
way but ended up in a world of pain. The initial dip was
a continuation of yesterday's drop but the indexes fought
off a strong wave of program selling to rebound back into
positive territory at midday. The Dow and Nasdaq both
stalled just below a 38% retracement of the big drop and
lingered in positive territory just long enough to sucker
in any bulls that thought the dip was over. The high of
the day was about 12:15 and the bleed began once again.
The big drop came at 3:30 when the Dow broke 9400 for the
last time. It closed at 9344, Nasdaq 1819 and S&P just
barely over the psychological 1000 level at 1003. Some
blamed it on the earthquake, others on end of quarter
portfolio rebalancing. Wasn't that what they used as a
reason for the bounce on Tuesday? Either way it was nasty
and the Emini futures closed well under 1000 at 997.75.
This does not bode well for Friday.
The biggest losers were the tech stocks and the small caps.
The very indexes that saw the biggest gains in recent months.
The Russell dropped nearly -13 points today and is down -4.8%
for the week. The Nasdaq fell -26 but is down -5% for the
week. These are not good numbers for the bulls. It represents
a definite selling of the winners. The markets have not had
two consecutive quarters of gains in several years and some
analysts think that funds are willing to forego the 4Q and
lock in substantial profits now to protect their year. Most
believe the markets will finish higher for the year but not
much higher. The general consensus is around 10,000. This
creates risk for the funds. With many stocks up +50% to even
+100% since the October and March lows the funds are faced
with a risk reward scenario of a potential +7% gain for the
rest of the year or the potential for a much larger drop if
the selling becomes widespread. Techs and small caps have
already dropped -5% this week. What does the future hold?
OPEC is cutting production on oil to drive prices back up.
The economic recovery is starting to show signs of weakness
and job growth is nonexistent. The Fed is not likely to
cut rates again even though they feel the risks of deflation
outweigh the risks of inflation. Japan is tanking and after
today its economy could suffer even more depending on the
earthquake damage. The dollar/yen battle is continuing and
bonds are slowly climbing which indicates doubt about the
future. 3Q earnings will begin to appear in seven days and
only First Call is really optimistic. Investors are becoming
more cautious. The bottom line is more risk than reward for
funds which have to perform to please their investors. The
competition for dollars is going to be fierce in January as
investors unhappy with their returns for 2003 start looking
for another place to park money. Those that lock in +30%, 50%
or even 60% gains over the next couple weeks could win the
bragging rights contest in January if the 4Q fails to move
up substantially.
That brings us right back to the historical trends scenario
once again. Funny, I did not get a single piece of bullish
hate mail today. With the Dow down -342 points from Friday's
highs there is little to be bullish about. That is only -3.5%
for the Dow but it is a chink in the bullish armor. I have
no claims to a crystal ball for forecasting the potential
lows for October if the decline continues but I can guarantee
it will not be straight down. The most likely serious support
is 9000-9100 and that is where I expect the eventual battle
for control to be fought. It you take traditional market
metrics for gains and eventual pullbacks the numbers are
scary but even the bears do not expect traditional numbers
to repeat. A simple 38% retracement would see a Dow drop to
near 8800 where a 25% retracement of the gains from March
would stop around 9100. You draw your own conclusions but
with -342 points in a week and we are not even in October
yet anything is possible.
For Friday the GDP and the earthquake will rule. However
with the -342 point drop there could be come profit taking
from shorts eager to put an X in the win column for a change.
Monday marks a new round of economic reports for the week
with a new ISM, Factory Orders and Nonfarm Payrolls being
closely watched for signs of weakness. That should be a
great start for October. Stay tuned.
Enter Very Passively, Exit Very Aggressively!
Jim Brown
Editor
***************
FUTURES MARKETS
***************
Gold Dojis, Treasuries Drift, Equities Sell
Jonathan Levinson
Another high volume day on the exchanges brought us solid
declines in equities, with ES dropping .94%, NQ 1.35% and YM
1.21%. December gold set a new multiyear high intraday before
falling to yesterday’s low, while bonds reversed early losses to
close positive on the day.
Daily Pivots (generated with a pivot algorithm and unverified):
Note regarding pivot matrix: The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula. They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm. Do not think of them as market "calls"
or predictions. Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions. Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.
15 minute chart of the US Dollar Index
The US Dollar Index got sold to new lows on this move, bottoming
at 93.40. The low coincided with a new rally high of 394.80 for
December gold, but the bounce took it back and then some, with
gold reaching an intraday low of 385.10. The CRB advanced .09 to
242.56 on strength in wheat, cocoa and platinum futures.
Daily chart of December gold
In honor of the new high and lower close, an outside bearish
engulfing doji reversal day, I’ve included the customary daily
chart of front-month gold, as well as daily and weekly charts of
the Amex Goldbugs Index, the HUI.
December gold dropped to a low of 385.10, but the end of day
selloff in equities once again drove money toward the metal, with
gold down 1.50 at 386.90 on the ACE as of this writing. The day
was not bullish, either a consolidation of the recent gains or a
doji top. I hesitate to use the word “blowoff”. With CNBC
talking about gold, I am a nervous gold bull for the time being.
The selling today flattened the oscillators and teased bulls with
a failed upside breakout above the bear wedge.
6 year weekly chart of the HUI
The HUI gave up 9.3 points to close at 201.20, while the XAU
dropped 3.98 points to 93.52. Viewed over a 6 year timeframe,
there’s nothing bearish about this chart. Indeed, although I
haven’t labeled it here, the 155 level could be seen as the
neckline of a nearly 6 year reverse head and shoulders bottom.
As subscribers to the Market Monitor and Futures Monitor know, I
have been bullish on precious metals and the miners (HUI and XAU)
since sprint 2002, and while today’s pullback was impressive, the
weekly chart paints a very bullish picture. However, nothing
goes straight up or down, which is the context in which today’s
correction can be seen.
6 month daily chart of the HUI
Today’s 9.3 point drop engulfed this week’s gains and appears to
be completing a bearish non-confirmation of September’s gains,
with a negative divergence printed on the 10 day stochastic. A
closing break below 200 implies a new downphase underway, with
strong support in the 155-160 area. However, 175 and 192 should
find their share of bids first.
Daily chart of the ten year note yield
Treasuries opened to light selling which reversed to light
buying, with the ten year note yield (TNX) closing lower by 3.3
bps at 4.102%. The apex of the bullish descending wedge on the
daily TNX chart was penetrated briefly but not held. If buying
in ten year notes/ decline in the yield continues, the break
below the bull wedge will complete what is becoming an
increasingly common false wedge break. We’ve been seeing these
all year with such frequency that I’m beginning to think of them
as a separate chart pattern. Nevertheless, the oscillators
continue to hint at a bottom forming in the yield, which would
cap further gains in ten year treasuries. Until the wedge apex
is broken on a closing basis, current levels will continue to
look bearish for ten year notes/bullish for the TNX.
Daily NQ candles
Equities had a bad day today, retracing part of yesterday’s
losses and then falling apart heading into the close, going out
within 1 point of their low prints of the day and leaving an
unequivocal message on the charts. On the daily candles, the
downphase is in full swing now, with the 30 minute chart
oscillator bounces discussed last night failing today from a
lower high and setting the stage for lower price lows. On the
daily chart, the drop stopped right on Fibonacci support.
However, with the daily and 30 minute chart oscillators fully in
gear to the downside, support might not give bulls as many
chances as it did today.
30 minute 20 day chart of the NQ
The end of day selloff left the NQ right above descending
trendline support. The 300 minute stochastic and the Macd are
just beginning their downphases here, and so other than a short
cycle bounce off lower trendline support, most likely to be
expressed as a sideways drift in price, I’m expecting to see more
selling tomorrow.
Daily ES candles
The ES looks just like the NQ. It got smoked today, trapping
bulls who tried to play the bounce for anything more than a
scalp, failing from a lower high and breaking to a lower low.
The combination of rolling weekly (not shown), daily and 30
minute chart oscillators from overbought leaves bulls with little
to hope for at current levels, other than to secure their
profits.
20 day 30 minute chart of the ES
As noted in the discussion of the NQ, the short cycle intraday
oscillators (not shown) are, as one might expect, severely
oversold and trending under the weight of the longer cycle
downphases now playing out. Nevertheless, combined with the
descending trendline pictured above, at least some kind of bounce
can be expected. With the longer cycles in bear rolls, it looks
like “short every rally” is the strategy for now. As always,
stops and careful entries are the key.
Daily YM candles
Nothing to add on the YM.
20 day 30 minute chart of the YM
Other than the shakeout in gold and the relatively tame buying in
treasuries despite a net 3B addition from the Fed via overnight
repos, today played out as could be expected. Dollar weakness
hurt equities, which bounced on cue and continued lower. Whether
this continues tomorrow will have to be seen, but given the
picture on the daily charts, it looks downhill for equities for
now.
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****************
MARKET SENTIMENT
****************
Bear Sightings on Wall Street.
-J Brown
Skittish investors ran for cover after a somewhat turbulent
session in the markets. Early morning news from Dow component
Eastman Kodak (EK) put traders on the defensive. The company
said they were slashing their cash dividend from a semiannual
payment of 90 cents a share to 25 cents in an effort to use the
$1.3 billion in savings for digital technology investments. This
was the first cut in its dividend in over 100 years and the stock
lost 18% by the close making it the biggest loser in the
$Industrials.
Bulls tried to battle back midday to push the markets into the
green but their bravery faded again. This week has been haunted
by concerns that stocks are now too richly valued after such an
incredible rally from this year's lows. We warned readers a few
weeks ago that valuation downgrades would be the next cycle of
headlines to pull stocks backwards and that's what we're
witnessing. Not necessarily a valuation call, but on Tuesday
Smith Barney cut their outlook on the defense sector and reduced
several stocks to neutral or sell. Today we saw a similar
performance from Bank of America who cut their forecast on the
defense sector and downgrading several related stocks. Morgan
Stanley even chimed in with a downgrade of the industry to
"neutral".
Looking overseas for strength was no help. The dollar may have
stalled its flight against the yen but Asian exchanges were lower
again today with the NIKKEI leading the way. European stocks
were mixed with a small bounce in the German DAX after
yesterday's big drop.
Looking closer to home we see the Dow Jones Industrials and the
NASDAQ composite making new short-term relative lows. The INDU
has actually pulled back to its simple 50-dma. The weakness was
certainly wide spread and there were several averages breaking
support like the RUT, which closed below its 500 level. Market
internals were strongly negative with declining stocks out
numbering advancers 19 to 8 on the NYSE and 23 to 8 on the
NASDAQ. Down volume was more than twice up volume on the NYSE
and swamped up volume 4-to-1 on the NASDAQ.
This sudden weakness actually smells like the real thing (not
just a dip) as the volatility indices have finally spiked higher
indicating growing investor fear. Speaking of fear, the news
that inspectors found weapons grade uranium in Iran could come
back to haunt us. Iran has until October 31st to prove to the
Intl Atomic Energy Agency that it does not have a secret nuclear
weapons program. Should they fail to do so, the volatile world
stage could get even more so.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 9686
52-week Low : 7197
Current : 9343
Moving Averages:
(Simple)
10-dma: 9521
50-dma: 9338
200-dma: 8683
S&P 500 ($SPX)
52-week High: 1040
52-week Low : 768
Current : 1003
Moving Averages:
(Simple)
10-dma: 1022
50-dma: 1001
200-dma: 930
Nasdaq-100 ($NDX)
52-week High: 1406
52-week Low : 795
Current : 1325
Moving Averages:
(Simple)
10-dma: 1367
50-dma: 1304
200-dma: 1142
-----------------------------------------------------------------
Ah.. finally we're starting to see some movement here. With the
markets actually feeling some selling pressure the new VIX is up
strongly in the last two sessions. The VXN has also responded but
both "indices" are under bearish resistance. If the market indices
drop through their next level of support then the VIX and VXN could
break out higher.
CBOE Market Volatility Index (VIX) = 22.26 +1.04
Nasdaq Volatility Index (VXN) = 30.65 +1.29
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.84 670,213 565,114
Equity Only 0.69 533,492 372,277
OEX 0.69 32,507 22,478
QQQ 1.35 43,165 58,691
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 72.8 + 0 Bull Confirmed
NASDAQ-100 79.0 - 2 Bear Correction
Dow Indust. 80.0 - 3 Bull Correction
S&P 500 81.0 - 1 Bull Confirmed
S&P 100 84.0 - 2 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.47
10-Day Arms Index 1.21
21-Day Arms Index 1.13
55-Day Arms Index 1.05
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
-NYSE- -NASDAQ-
Advancers 870 795
Decliners 1945 2307
New Highs 48 86
New Lows 12 3
Up Volume 506M 378M
Down Vol. 1318M 1641M
Total Vol. 1857M 2031M
M = millions
-----------------------------------------------------------------
! The COT Website has NOT updated their data since 09/09/03.
Commitments Of Traders Report: 09/09/03
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
No change in sentiment for the commercial traders here. Meanwhile
small traders forked out a little more cash to increase both
their long and short positions.
Commercials Long Short Net % Of OI
08/19/03 404,665 455,381 (50,716) (5.9%)
08/26/03 410,378 472,987 (62,609) (7.1%)
09/02/03 417,973 482,392 (64,419) (7.2%)
09/09/03 418,958 486,209 (67,251) (7.4%)
Most bearish reading of the year: (111,956) - 3/06/02
Most bullish reading of the year: 18,486 - 6/17/03
Small Traders Long Short Net % of OI
08/19/03 162,034 87,064 74,970 30.1%
08/26/03 170,424 76,967 93,457 37.8%
09/02/03 169,030 75,748 93,282 38.1%
09/09/03 176,401 81,444 94,957 36.8%
Most bearish reading of the year: (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
E-MINI S&P 500
Commercial traders in the e-minis continue to pump up their
long positions. The last numbers show the most bullish
posture in quote sometime. Meanwhile the small trader has
rotated a little bit of money from short back to long.
Commercials Long Short Net % Of OI
08/19/03 296,971 235,779 61,192 11.5%
08/26/03 338,766 234,841 103,925 18.1%
09/02/03 347,724 224,011 123,713 21.6%
09/09/03 370,909 237,610 133,299 21.9%
Most bearish reading of the year: (354,835) - 06/17/03
Most bullish reading of the year: 133,299 - 09/02/03
Small Traders Long Short Net % of OI
08/19/03 90,428 125,980 (35,552) (16.4%)
08/26/03 52,131 120,853 (68,722) (39.3%)
09/02/03 56,709 134,094 (77,385) (40.6%)
09/09/03 59,692 130,270 (70,578) (37.1%)
Most bearish reading of the year: (77,385) - 09/02/03
Most bullish reading of the year: 449,310 - 06/10/03
NASDAQ-100
Commercial traders are increasing their bets on the NDX
but they're still beating more heavily on a move lower.
Small Traders are also active with larger net positions
but they're still beating on the bulls.
Commercials Long Short Net % of OI
08/19/03 32,107 53,665 (21,558) (25.1%)
08/26/03 33,991 55,849 (21,858) (24.3%)
09/02/03 37,002 55,379 (18,377) (19.9%)
09/09/03 44,677 62,369 (17,692) (16.5%)
Most bearish reading of the year: (21,858) - 08/26/03
Most bullish reading of the year: 9,068 - 06/11/02
Small Traders Long Short Net % of OI
08/19/03 25,607 10,134 15,473 43.3%
08/26/03 26,108 8,864 17,244 49.3%
09/02/03 23,168 10,561 12,607 37.4%
09/09/03 28,788 13,370 15,418 36.6%
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year: 19,088 - 01/21/02
DOW JONES INDUSTRIAL
No change in investor sentiment for the professional traders
here. There is little change for the small trader but they
have bumped up their long positions a tad.
Commercials Long Short Net % of OI
08/19/03 21,088 18,984 2,104 5.3%
08/26/03 24,586 10,386 14,200 40.6%
09/02/03 25,462 10,447 15,015 41.8%
09/09/03 25,807 10,756 15,051 41.2%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
08/19/03 15,717 9,143 6,574 26.4%
08/26/03 14,115 5,592 8,523 43.2%
09/02/03 6,629 13,402 (6,773) (33.8%)
09/09/03 7,429 13,796 (6,367) (30.0%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 8,523 - 8/26/03
-----------------------------------------------------------------
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The Option Investor Newsletter Thursday 09-25-2003
Copyright 2003, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
In Section Two:
Dropped Calls: AU, ERTS, LUV
Dropped Puts: None
Call Play Updates: AMZN, AXP, APOL, IBM, LEA, SLB
New Calls Plays: None
Put Play Updates: CCMP, KKD, GILD
New Put Plays: JCI
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
Anglogold Ltd. - AU - close: 38.90 change: -2.18 stop: 39.00
All good things come to an end and Thursday's 4% slide in the
Gold and Silver index (XAU.X) spelled the end for our AU play.
After nearly 3 weeks of trying to build on the early September
breakout over $39, the stock looks like it lost that battle
today, with a 5.3% loss on volume that nearly doubled the daily
average. Our $39 stop level seems to have been the right spot as
it was defended a couple of times throughout the day before the
final wave down at the close. Despite the fundamentally bullish
case for gold shares, the technicals are in charge here, with
investors rushing to harvest gains. With our stop violated at
the close, we've no choice but to join the crowd. But we'll keep
an eye on this sector for another bullish play in the very near
future.
Picked on September 2nd at $39.51
Change since picked: -0.61
Earnings Date 10/30/03 (unconfirmed)
Average Daily Volume = 870 K
Chart =
---
Electronic Arts - ERTS - close: 93.62 chg: +0.00 stop: 93.00
We suspected that profit taking might hit ERTS eventually and
that's why we raised our stop loss to $93.00 on Tuesday.
Unfortunately, the stock continued its slide from Wednesday early
on this morning and soon traded below our stop at $93.00. ERTS
was quick to bounce back but what may be more disturbing was the
later afternoon drop. Volume really began to pick up speed into
the close. Now that we're out we can think about our next entry
point. If the markets keep dropping then a bounce from the 30-
dma near $90.00 might be the next bullish entry point for ERTS;
or the next bearish entry point should it break.
Picked on August 28 at $89.06
Change since picked: +4.56
Earnings Date 07/23/03 (confirmed)
Average Daily Volume: 3.3 million
Chart =
---
Southwest Airlines - LUV - close: 17.87 change: -0.31 stop: 17.75
Despite a very promising chart breakout back on September 11th,
shares of LUV just haven't been able to maintain altitude. The
stock did manage to trade as high as $19, before beginning the
retracement that is now nearly 2 weeks old. Today's close below
$18 turns the picture even less positive and it appears the stock
is headed back to test its rising trendline at $17.40. The
breakdown of the Airline index (XAL.X) below $61.30 support has
bearish implications as well. There's very little in the way of
support between today's close and that level, and rather than
wait for our stop to be hit, we'll take a pre-emptive exit
tonight. If things firm up at a lower level, it may be worth
another shot at the bullish side, but for right now, exiting for
a small loss makes the most sense.
Picked on September 11th at $18.36
Change since picked: -0.49
Earnings Date 10/20/03 (unconfirmed)
Average Daily Volume = 2.56 mln
Chart =
PUTS:
*****
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PLAY UPDATES - CALLS
********************
Amazon.com - AMZN - close: 50.05 change: +0.44 stop: 46.50
The profit taking in the rest of the market has done little more
than cause the bulls to pause in the Internet sector, and our
AMZN play has held up amazingly well so far. On the cautious
side of the coin though, we note that the stock has failed on
three attempts to push outside of the ascending channel, with the
$51 level providing firm resistance. With daily Stochastics
flattened out in overbought, we may have to endure a bit of
weakness before the next leg up. Look for a pullback into the
$47.50-48.00 to provide a new entry point on a rebound from the
midline of the channel. Chasing the stock higher from here
without a mild pullback first is not for the faint of heart and
we would counsel patience and caution, especially in light of the
weakness throughout the rest of the market. Traders already
holding open positions should continue to use a stop at $46.50,
which is not only below the midline of the channel, but also the
20-dma ($47.08).
Picked on September 18th at $47.89
Change since picked: +2.16
Earnings Date 10/21/03 (unconfirmed)
Average Daily Volume = 8.74 mln
Chart =
---
American Express - AXP - close: 45.61 chg: -0.29 stop: 44.49
Profit taking was widespread on Wall Street today and the
financial sectors were no exception. The BKX banking index
pulled back to its simple 50-dma and should this technical level
fail then another retest of the 850-855 level could be in the
cards. This would probably accentuate the selling in high
profile names like AXP and we would expect to be stopped out.
Given yesterday's drop in shares of AXP and the follow through
today we are not suggesting traders take new bullish positions.
The $45.60 level held up as support twice today but given the
negative close we suspect AXP will probably test its own simple
50-dma near $45 tomorrow.
Picked on September 18 at $47.08
Change since picked: - 1.47
Earnings Date 10/27/03 (unconfirmed)
Average Daily Volume: 3.9 million
Chart =
---
Apollo Group - APOL - close: 65.59 chg: -1.10 stop: 64.00
The consolidation in shares of APOL continues. The recent market
weakness has brought APOL back to the $65 level, which was
previously resistance and should now be support. The rising 21,
30 and 50-dma's should offer some technical help. Under normal
circumstances we'd probably see this dip to $65 as a new entry
point. However, given the late afternoon decline in both the
markets and APOL we would not suggest new plays in APOL until we
saw a decent bounce back above the $67 level. More aggressive
traders can try and gauge a new entry off any bounce near $65.
There is no new news.
Picked on September 16 at $68.45
Change since picked: - 2.86
Earnings Date 10/07/03 (confirmed)
Average Daily Volume: 1.9 million
Chart =
---
Intl Business Machines -IBM- cls: 89.41 chg: -0.01 stop: 87.90
Uh-oh...it looks like bad news for Big Blue. The profit taking
has brought shares back below the $90 level, which should have
been much stronger support. Yesterday's close under $90 was bad
enough but today's failed rally back under $90 clearly points to
more profit taking. As would be expected all the technical
indicators have rolled over and look bearish. We might see a
bounce at $88.00 or the 21-dma near $88.19 but that is being
hopeful. Our stop loss is at $87.90 and we'd rather not lower
it. Should the profit taking follow a 38.2% or 50% retracement
of the August-September rally then we can look for IBM to slip
towards the $87.80 or $86 respectively. Meanwhile, investors are
ignoring positive press from the likes of Standard & Poor's who
on Wednesday said that there were signs of growth in the U.S.
hardware industry. Solectron reiterated those comments about
gradual improvement this afternoon but tech stocks still took the
biggest bruises. We are not suggesting new bullish plays at this
time and conservative traders may want to get out at the open to
save capital before IBM falls any further. There will always be
another entry point later.
Picked on September 23 at $91.34
Change since picked: - 1.93
Earnings Date 10/15/03 (unconfirmed)
Average Daily Volume: 6.7 million
Chart =
---
Lear Corp - LEA - close: 53.62 change: -0.04 stop: 53.25
The recent bounce in shares of LEA continues to wither under the
market's weakness. The pull back in Lear has been somewhat
orderly and the stock stalled at the simple 50-dma today.
Unfortunately, we fear that if the markets drop again tomorrow
we'll quickly be stopped out at the $53.25 stop loss price.
We're certainly not suggesting new bullish plays at this time.
Picked on September 16 at $54.05
Change since picked: - 0.46
Earnings Date 10/17/03 (confirmed)
Average Daily Volume: 694 thousand
Chart =
---
Schlumberger Ltd. - SLB - close: 49.39 change: -1.54 stop: 47.50
After last week's breakout above the months-long consolidation,
we were expecting a pullback to confirm old resistance as new
support in SLB. Well, we got that pullback on Thursday, but
quite honestly it was a bit steeper than we had bargained for.
Losing just over 3% on the day, SLB fell back inside the bullish
triangle pattern that it fell out of last week and came to rest
just below what should have been support at $49.50. This
introduces the very real possibility that the stock will drop to
test the rising trendline (now at $48.15) before a resumption of
the uptrend. We don't want to get caught trying to catch a
falling knife if that breakout proves to be a bull trap, so wait
for the rebound before considering new entries. Ideally that
rebound should come from above the 30-dma ($48.80), but we must
wait to see what the market delivers. Our stop at $47.50 is
below both the ascending trendline and the 50-dma ($47.67), so if
it is hit, we'll have an unambiguous signal that the bullish move
was a trap.
Picked on September 21st at $50.99
Change since picked: -1.60
Earnings Date 10/21/03 (unconfirmed)
Chart =
**************
NEW CALL PLAYS
**************
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*******************
PLAY UPDATES - PUTS
*******************
Cabot Microelect. - CCMP - cls: 56.57 chng: -0.57 stop:
61.25*new*
Thursday's slide in the Semiconductor index (SOX.X) was nothing
compared to the carnage seen on Wednesday, but the index did
manage to slide fractionally lower, keeping pressure on our
bearish CCMP play. At this point, the SOX looks vulnerable to
the $420 and then $400 levels, and that bodes very well for CCMP
reaching our initial target of $55. Following an early rebound
this morning, CCMP found resistance just below $59 and rolled
sharply lower into the close, ending at its low of the day with
volume rising sharply. Currently right at closing support from
the month of July, the stock could rebound from here or continue
down with a vengeance. Failed rebounds below the $59 level still
look good for new entries, with momentum traders best served by
waiting for a break under $55 before adding new positions. We
want to give the play room to move without giving too much back,
so our stop moves down to $61.25, just above the bottom of
Monday's gap, as well as the 10-dma ($61.21).
Picked on September 23rd at $59.05
Change since picked: -2.48
Earnings Date 10/23/03 (unconfirmed)
Average Daily Volume = 769 K
Chart =
---
Krispy Kreme - KKD - cls: 37.83 chg: -1.02 stop: 40.36 *new*
Listen up Krispy Kreme bears... the 2.6 percent drop today has
brought us when striking distance of our original exit range of
$37.50 to $36.00. It's time to double check those sell orders.
While you're at it we're lowering our stop loss to $40.36 should
we be surprised with a bounce. Both $37.00 and $37.50 were minor
resistance levels in June on the way up and they could be minor
support on the way down. We do expect some support at the 200-
dma, which is currently near $36.50. This close to our suggested
exit we are not recommending new bearish positions.
Picked on September 8 at $41.69
Change since picked: - 3.86
Earnings Date 08/21/03 (confirmed)
Average Daily Volume: 1.0 million
Chart =
---
Gilead Sciences - GILD - close: 55.75 chg: -0.43 stop: 60.01*new*
The sell-off continues for shares of GILD too. After breaking
the $60 level of support five days ago volume has been pretty
decent as investors take home some gains. Currently, GILD is at
a significant support level. Does the stock bounce from $55 or
does it continue lower towards the $50 mark? Shares are
obviously oversold at this point but if the markets keep dropping
then we're likely to see GILD follow. The stock did bounce near
the $55 level intraday but in late afternoon trading $57 appeared
to offer new resistance and we actually expect more weakness
tomorrow given the last half hour for GILD. Short-term traders
can actually consider taking profits here or as it closes with
the $55 mark. Looking again at the P&F chart we see support near
$53-54, which is something to consider. We are lowering our stop
loss to $60.01.
Picked on September 16 at $59.40
Change since picked: -3.65
Earnings Date 07/31/03 (confirmed)
Average Daily Volume: 3.31 million
Chart =
*************
NEW PUT PLAYS
*************
Johnson Controls - JCI - close: 95.75 change: -0.77 stop: 99.25
Company Description:
Johnson Controls, Inc. is engaged in automotive systems and
facility management and control. In the automotive market, the
company is a major supplier of seating and interior systems and
batteries. For non-residential facilities, JCI provides building
control systems and services, energy management and integrated
facility management.
Why we like it:
The strongly bullish action in the auto-related stocks in recent
months has been quite impressive and shares of JCI have gleefully
gone along for the ride, rising to new all-time highs above $100.
But that party seems to have come to a screeching halt this week,
with the stock gapping down below the century mark on Monday and
there has been little pause in the subsequent selling. Even
blowout earnings from AZO on Tuesday was only enough to pause the
slide before it began anew yesterday morning. The break below
the 50-dma was one necessary support break and the next milestone
will be a trade below $95. Trading that level will put the PnF
chart back on a Sell signal, violate significant support from
July and August and open the door for a slide below $90. Once
that $95 level is traded, the tentative PnF vertical count will
be $90, making it a good initial target to shoot for. If the
bears really get ambitious, then a decline to the $86.50-87.00
area at the bottom of the mid-July gap looks achievable.
Aggressive traders can look to enter ahead of the breakdown on a
failed rebound below the 50-dma ($97.53), but need to understand
that until $95 is traded, the chart is technically bullish to
neutral. More conservative traders will need to see the
breakdown before considering an entry. The ideal approach would
be to enter on the breakdown under $95 (which also happens to be
a breakdown below the ascending trendline from the March lows),
while even more patient traders might get a shot at a subsequent
failed rebound in the $95-96 area. Regardless of entry strategy,
we're initially setting our stop at $99.25, just above the bottom
of Monday's gap.
Suggested Options:
Aggressive short-term traders will want to focus on the October
95 Put, as it will provide the best return for a short-term play.
Longer term traders will want to look to the November 90 Put, as
it should provide ample time for JCI to move in our favor without
time decay becoming a major factor. But take note that these
were just listed on Monday and open interest is still very low.
BUY PUT OCT-95 JCI-VS OI=402 at $1.75 SL=0.75
BUY PUT OCT-90 JCI-VR OI=192 at $0.55 SL=0.25
BUY PUT NOV-90 JCI-WR OI= 12 at $1.45 SL=0.75
Annotated Chart of JCI:
Picked on September 25th at $95.75
Change since picked: +0.00
Earnings Date 10/22/03 (confirmed)
Average Daily Volume = 479 K
Chart =
------------------------------------------------------------
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The Option Investor Newsletter Thursday 09-25-2003
Copyright 2003, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
In Section Three:
Play of the Day: PUT - JCI
Traders Corner: When A Straddle Feels Soooo Good!
Traders Corner: A New ETF for Trading the S&P
Traders Corner: Is Trading Your Business or Your Hobby? The IRS &
Your Bank Account Want to Know
*********************
PLAY OF THE DAY - PUT
*********************
Johnson Controls - JCI - close: 95.75 change: -0.77 stop: 99.25
Company Description:
Johnson Controls, Inc. is engaged in automotive systems and
facility management and control. In the automotive market, the
company is a major supplier of seating and interior systems and
batteries. For non-residential facilities, JCI provides building
control systems and services, energy management and integrated
facility management.
Why we like it:
The strongly bullish action in the auto-related stocks in recent
months has been quite impressive and shares of JCI have gleefully
gone along for the ride, rising to new all-time highs above $100.
But that party seems to have come to a screeching halt this week,
with the stock gapping down below the century mark on Monday and
there has been little pause in the subsequent selling. Even
blowout earnings from AZO on Tuesday was only enough to pause the
slide before it began anew yesterday morning. The break below
the 50-dma was one necessary support break and the next milestone
will be a trade below $95. Trading that level will put the PnF
chart back on a Sell signal, violate significant support from
July and August and open the door for a slide below $90. Once
that $95 level is traded, the tentative PnF vertical count will
be $90, making it a good initial target to shoot for. If the
bears really get ambitious, then a decline to the $86.50-87.00
area at the bottom of the mid-July gap looks achievable.
Aggressive traders can look to enter ahead of the breakdown on a
failed rebound below the 50-dma ($97.53), but need to understand
that until $95 is traded, the chart is technically bullish to
neutral. More conservative traders will need to see the
breakdown before considering an entry. The ideal approach would
be to enter on the breakdown under $95 (which also happens to be
a breakdown below the ascending trendline from the March lows),
while even more patient traders might get a shot at a subsequent
failed rebound in the $95-96 area. Regardless of entry strategy,
we're initially setting our stop at $99.25, just above the bottom
of Monday's gap.
Suggested Options:
Aggressive short-term traders will want to focus on the October
95 Put, as it will provide the best return for a short-term play.
Longer term traders will want to look to the November 90 Put, as
it should provide ample time for JCI to move in our favor without
time decay becoming a major factor. But take note that these
were just listed on Monday and open interest is still very low.
BUY PUT OCT-95 JCI-VS OI=402 at $1.75 SL=0.75
BUY PUT OCT-90 JCI-VR OI=192 at $0.55 SL=0.25
BUY PUT NOV-90 JCI-WR OI= 12 at $1.45 SL=0.75
Annotated Chart of JCI:
Picked on September 25th at $95.75
Change since picked: +0.00
Earnings Date 10/22/03 (confirmed)
Average Daily Volume = 479 K
Chart =
------------------------------------------------------------
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TRADERS CORNER
**************
When A Straddle Feels Soooo Good!
By Mike Parnos, Investing With Attitude
POSITION ACTIVITY ALERT – Life is beautiful when things go
according to plan. How often does that happen? OK, so it's
pretty rare. But it happened Wednesday morning with our APPX
straddle position.
As anticipated, APPX received positive results on a drug test and
the stock ran up to $44.14 at the open – a gain of almost $5.
Within a couple of minutes it came back to the $43.50 area. What
happened to our straddle? What we had paid $11.20 for on Monday
was suddenly worth $12.60 (Calls: $9.80, Puts: $2.80). It was
time for CPTI students to GTFO (close the position and take
profits).
The $1.40 profit represents a 100% return on what we were willing
to risk. (See the position detail explained below). The rubles
are back safely in our pockets and we chalked up a $1,400 profit.
It only took two days instead of a month.
Will APPX move higher? Maybe, maybe not. (Actually, at this
writing, APPX gave it all back -- and then some.) Gordon Gekko
may have lived his "greed is good" mantra. But life has taught me
to be part couch potato and part chicken. So, we bid a fond
farewell to APPX, wishing it well. We took our pound of flesh. I
noticed some volume on the January $36.635 puts and calls on
Wednesday morning, so some CPTI students are sitting on their
couch wearing nothing but a smile. It felt good for us. Was it
good for you?
_____________________________________________________________
The Market Giveth – Then Taketh Away
BBH – Our "Joined" Iron Condor. Well, the damn thing tanked.
Around noon on Wednesday it violated our lower parameter of
$133.85. So, because we're responsible traders who adhere to our
trading plan, we had to bail out on the position. We bought back
our $140 put for $7.30 and we sold our long $130 put shortly
thereafter for $1.75. Then, we closed the $140/$150 bear call
spread. The total debit for closing the position was $6.45. We
took in $6.15, so we reluctantly take our loss of $300. But, at
the same time, we pat ourselves on the back for using good money
management techniques. We also free up $20,000 in maintenance to
potentially use for something else.
_____________________________________________________________
SPX Entry Adjustment
The letter below that arrived Monday, from a CPTI student, will
explain how, and why, we adjusted our entry of this month's SPX
Iron Condor.
Hi Mike,
With the down opening (on Monday), I waited the hour, as per your
recent advice. Could you clarify what is the best action, or non-
action, to take? What is the CPTI position regarding yesterday's
(Sunday's) recommendations on the SPX etc.? I found I could sell
the puts at a higher price, but naturally lower on the call side.
The credit is now skewed toward the puts, and is still within $.30
to $.40 cents of your prices. Could it still be a good trade? I
would appreciate an answer, because I do not want to miss out on
this month's trades if they could still be profitable. -- Vanny
Hi Vanny,
Good question! I'm pleased you avoided "amateur" hour before
considering trading. The large gap-down should have prompted
traders to adjust the SPX trade. We adjusted our SPX entry point
as follows. We were able to take in a similar amount of premium
(a total of about $2.30) by using 10 contracts of a 980/970 bull
put spread and 10 contracts of the 1065/1075 bear call spread.
This accomplishes a number of things. a) It establishes a new
range with the SPX comfortably in the middle; b) It allows you to
take advantage of lower strikes, thereby allowing you to trade 10
contracts on the bear call spread instead of five, making it
simpler; and c) It actually reduces your maintenance requirement
on the bear call spread from $12,500 (on the 1075/1100 spread) to
an even $10,000 on the new 1065/1075 spread. And lastly, we have
one less trading day of exposure.
Regarding the QQQ calendar spread -- the QQQ trade could have been
entered for the same $1 debit many times during the day (Monday).
We are hoping the QQQs go down, so we lose nothing.
BBH is actually a small index. While I'd prefer if it stayed
closer to $140, it's still a reasonable trade.
_____________________________________________________________
OCTOBER POSITIONS
October Position #1 – SPX Iron Condor – Trading @ 1003.27
We were going to sell 10 contracts of October SPX 995 puts and
then buy 10 contracts of October SPX 985 puts for a credit of
$1.20 ($1,200). Then we were going to sell 5 contracts of October
SPX 1075 calls and buy 5 contracts of October SPX 1100 calls for a
credit of $1.10 ($550). Total credit and potential profit:
$2,300.
The premium figures were based on Friday's posted closing prices
plus an extra $.20 here and there that you should be able to shave
off the wide bid/ask spreads. We would have created a maximum
profit range of 995 to 1075. Note that we we're only trading five
contracts on the calls because we had to limit our risk. Strike
prices weren't available for us to have a 10-point exposure, so we
had to use a 25-point exposure in the calls.
Due to a severe gap-down on Monday, we adjusted the parameters of
this SPX condor prior to entry. (See above letter).
October Position #2 – BBH Joined Iron Condor - Trading at $131.25
This is sort of a sell straddle with protective wings. In other
words, the puts and calls had the same strike prices.
We sold 10 contracts of October BBH 140 calls @ $3.90 and also
sold 10 contracts of October BBH 140 puts @ $4.50. For protection
we bought 10 contracts of October BBH 150 calls @ $.85 and bought
10 contracts of October BBH 130 puts @ $1.40. Our total credit
was $6.15 ($6,150) -- which is also our maximum potential profit.
We have created a profit range of $133.85 to $146.15. The closer
BBH finishes to $140, the more we will make. Our risk is limited
to $3.85. The parameters of our profit range were also our
bailout points. And damned if we didn't have to bail and take a
$300 loss. (See article above)
October Position #3 – QQQ – Put Calendar Spread – Trading @ $32.79
Want to risk a buck? Maybe less? Since many folks think the
market is due to correct, let's create a cheap play that will let
us take advantage of a nice down move.
We bought 10 contracts of January 04 QQQ $32 puts and sold 10
contracts of October 03 QQQ $32 puts for a total debit of $1.00
($1,000).
If/when the QQQs make their move down, the January $32 put will
increase in value more rapidly than the October $32 put. We'll
look for a $500-$750 profit on this position and take the money
and run. The risk is small. The percentage profit potential is
very appealing.
October Position #4 – APPX – Short Term Straddle – Trading @ $34.84
Here's a hit and run trade. APPX was scheduled to have FDA drug
test results released this month. These announcements (good or
bad) often result in $5+ moves in the stock. If there's a
reaction, we want to be in position to take advantage of it – and
limit our risk at the same time.
We bought 10 contracts of the January AFFX $36.25 calls @ $5.90
and bought 10 contracts of the January AFFX $36.25 puts @ $5.30
for a total debit: $11.20 ($11,200). You may be able to shave a
little off of each bid/ask and save $.20-.30. I know $11,200
sounds like a huge risk, but remember that we're only going to be
in this trade for 30 days or less. Since these are four-month
options, only about 10-15% of the $11.20 might erode during that
period. That's about $1.10-$1.50 risk.
Regardless of what happens, we're out of this trade in 30 days or
less. We'll settle for a $1-2 in profit. We had to be on our
toes, because announcement and the spike (up or down) can happen
quickly and may not last the entire day. It didn't. (See article
above)
______________________________________________________________
QQQ ITM Strangle – Ongoing Long Term -- $32.79.
We bought 10 contracts of the 2005 QQQ $39 puts @ $7.00 = $7,000
and also bought 10 contracts of the 2005 QQQ $29 calls @ $7.30 =
$7,300 for a total debit of $14,300. Then we sold 10 contracts of
the QQQ Oct. 33 puts @ $.85 = $850 and also sold 10 contracts of
the QQQ Oct. 34 calls @ $1.05 = $1,050 for a total credit of
$1,900.
HPQ (Hewlett Packard) Bear Put Spread – HPQ at $19.26.
HPQ is weak and may return to the $15 range. So, we bought 10
contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10
contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of
$1.85. Potential max profit of $3.15. We'd gladly accept a
profit of $800-900 and close the position early if the opportunity
presents itself. This is a long-term position.
OEX – Bearish Calendar Spread – OEX @ $502.62
We bought 8 contracts of OEX November 470 puts @ $10.60 and sold 8
contracts of OEX September 470 puts @ $2.20 for a total debit of
$8.40. The Sept. 470 puts obviously expired worthless. We were
going to sell the October 490 puts and take in another $2.10.
However, with the Monday market gap-down, we were able to take in
$3.10 instead. Our new cost basis is $5.30.
__________________________________________________________
New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner." They're waiting for you
24/7.
___________________________________________________________
Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP
**************
TRADERS CORNER
**************
A New ETF for Trading the S&P
An Exchange Traded Fund (ETF) combines many of the benefits of
index mutual funds but with the flexibility of stocks. Like
mutual funds, ETFs enable you to invest in a pool of securities
in one transaction. And similar to stocks, ETFs are listed on an
exchange so you purchase them through a brokerage account. ETFs
offer stock-like trading features enabling you to trade
throughout the day, purchase on margin, use limit and stop orders
and even short-sell. There are a number of different ETFs on the
market currently, including QQQs, SPDRs, sector SPDRs, MidCap
SPDRs, HOLDRs, iShares, and Diamonds. All of them are passively
managed, tracking a wide variety of sector-specific, country-
specific, and broad-market indexes.
On April 30, 2003 Rydex began offering (symbol RSP) a new ETF
based on the S&P Equal Weighted Index, an index composed of the
S&P 500 stocks but calculated in a way to give each stock an
equal weighting.
EFTs are introduced all the time, so why have I taken the time to
tell you about this new one? Well I have four reasons: (1) it
provides investors with true diversification; (2) is not subject
to the fortunes of a handful of stocks with very high market
caps; (3) could help technical indicators provide better
forecasting results; and (4) has the potential to out-perform the
cap-weighted version.
Firstly, except for the Dow, which is price-weighted, most major
market averages and industry/sector indexes are capitalization-
weighted. This means that the daily impact of a stock's price
change upon a given market index is weighted by multiplying its
price by the number of shares outstanding. The result is that a
handful of large-cap stocks will exert the most influence on the
index. For example, at the beginning of 2001 the top 25 (5%) of
S&P 500 stocks accounted for 40% of the total market cap of the
index, and the top 50 (10%) for 57%, and the top 100 (20%) for
72%. So the premise that investing in an S&P 500 index fund will
provide diversification is clearly not true. Investing in an
equal weighted ETF will give you true diversification.
Secondly, if a stock like Microsoft, Intel, Cisco were to give an
earnings guidance the market didn't like the whole S&P 500 index
would feel the pain, not just the stock, because they have such
an overweighed representation in this capitalization-weighted
index. Where do you think the saying, "investing in GE is a proxy
to investing in the S&P" came from? How GE goes so goes the S&P
(insert, MSFT, INTC, etc.)
Thirdly and perhaps the best argument for this equal-weighted
index is that there is a direct relationship between price
performance and the derivative indicators. Virtually all market
indicators, like the Advance-Decline Line, are unweighted
indicators, i.e each stock in the index carries an equal weight.
So using these indicators to analyze a cap-weighted price index
is probably not as effective as you think. Once again this is
because the movement of the price index is determined by the
weight of a just a few stocks, whereas the indicator does not use
the same representation. Using the RSP instead of the S&P should
make these indicators much more helpful to your analysis.
Fourthly, we need to look at performance, an important issue. How
does RSP perform relative to the S&P 500 Index?
Since RSP is a relatively new security making this comparison
will not be easy but I found a website that had the data prior to
4/30/2003 derived from back calculations of the S&P Equal Weight
Index. It is an accurate depiction of how RSP would have
performed, and it allows us to examine RSP performance over a
wide range of market conditions.
On the chart below, the top panel is RSP, the second panel the
S&P and the bottom panel is a ratio index that divides RSP by the
SPX, going back to 1990. When that index is rising, it means RSP
is stronger than the SPX.
Do you see the period between 1995 and 2000 where the ratio is in
a steady decline showing a period when the RSP was
underperforming the SPX? This was the timeframe when the large-
cap stocks were the darlings of all investors, new and old, and
money was flowing into them like molten lava to the sea. This was
also the period when small-cap was a dirty word. The divergence
reversed, however, after the SPX topped in 2000, caused mainly by
the fact that large-cap stocks began to tank. RSP did not begin a
serious decline until mid-2002, which is when all stocks, large-
cap and smaller-cap, were dirty words.
There are some interesting statistics regarding this comparative
performance. From the 1990 bear market low to the bull market
highs in 2000 (SPX) and 2001 (RSP) the SPX rallied +428% versus
+408% for RSP. The bear market decline into the October 2002 low
took the SPX down -50% versus only -40% for RSP. Finally, as of
9/16/2003 the rally from the October 2002 low has taken the SPX
up only +33% versus +54% for RSP. Not surprisingly, RSP is only -
8% off its all-time high versus -33% for the SPX.
The chart below gives us a closer look at a more recent time
frame.
As you can see the ratio has being rising since October 2000
showing RSP outperforming the S&P since that time.
Here is a table comparing the capitalization weighted S&P to the
equal weighted RSP.
RSP SPX
500 stocks 500 stocks
Equally Weighted Capitalization Weighted
Balance between value and growth Bias towards large cap
Quarterly rebalance No Rebalance
More small cap exposure Greater large cap exposure
No domination by few stocks 100 largest stocks equal 70%
of index
Sector exposure driven by index Sector exposure driven by was
is hot or was is not
Here is a graph showing RSP to be a superior tool for sector
diversification also. Notice how equal weighting in the S&P
(using the Equal Weight Index) results in equal representation in
sectors and prevents the over concentration in the popular
sectors like the Information Technology sector domination in 1999
to 2000.
I just saw an ad on CNBC, trying to pitch the Spiders (SPY). The
ad was going on how if you wanted true diversification and
exposure to the whole market you should be buying the SPY to get
this exposure and diversification with only one stock. First of
all the SPY is only 500 stocks not the whole stock market,
secondly the diversification, as we have just seen, is just a
little skewed. RSP is the much better vehicle to get diversified
over at least 500 stocks.
Remember plan your trade and trade your plan.
Jane Fox
**************
TRADERS CORNER
**************
Is Trading Your Business or Your Hobby? The IRS & Your Bank
Account Want to Know
By: Dave Fleck, CPA
If you are a trader who wants to trade part-time, from home, make
a more than full-time income, and create lasting financial
security, listen up.
Last May, I met a very wise man who shared something that is
going to help you. He has been a personal coach to hundreds of
people, from all walks of life for over twenty years. His
students get tremendous results, over and over again. You would
recognize some of their names.
His style is simple and direct. He asks his students,
“What Are You Up To?”
Does that seem like a stupid question? Sure, it might seem a bit
too simple. It is not stupid though. Far from it.
I suggest you ask yourself that same questionthe smart folks
reading this already didthe wealthy readers already know the
answer.
For the rest of you, let me give you some advice. You are what
you do. Not what you want to do, plan to do, or hope to do. Or
even more precisely: You are what you are.
So, are you a trader in the business of trading? Or, are you a
trader, who treats it like a hobby?
Listen to This Shocking But True Story of Joe the Hobbyist.
Joe has been trading full-time since 1999. In his first year of
full-time trading he was extremely successful. He made over
$250,000 from trading. However, starting in the spring of 2000,
Joe’s account started to crater. This probably won’t surprise
you, but Joe hadn’t made any quarterly estimated tax payments
during 1999. As a result, he couldn’t pay his tax bill, even
though he had netted over a quarter million dollars.
It gets worse. Over the next two years, Joe managed to lose over
$400,000 of his trading capital.
Have you heard of the capital loss carryover? That is the
provision granted by Our Most Generous IRS that allows Hobbyists
like Joe to deduct $3,000 of capital losses every year! So, don’t
worry about Joe, he’s good with that deduction for another 130
years.
Without going into all of the details, just know that if Joe had
been in the business of trading, the tax rules would have been
completely different, and his trading losses would have resulted
in a refund from the IRS, rather that a foreclosure notice from
his bank.
The Two Sets of Tax Rules
Over my fourteen years in the tax field - working with
individuals ranging from the middle class to the very wealthy - I
have come to realize that there are two sets of tax rules in the
Tax Code.
One set of rules is for the individuals that work all of their
life as employees for a company. The defining characteristic of
these individuals is that they struggle to make ends meet and
hope that after they retire their pension or social security will
provide an adequate income for them to live on. (Doesn’t that
sound like a crappy existence?)
The other set of rules benefits the individual who is a business
owner. This individual is able to utilize a hidden tax system
that is deliberately designed to help business owners create and
accumulate great wealth.
The High-Paid Corporate Lobbyists Are Working For You
What is this hidden tax system? It is the tax system of America
that has been largely written by the high-paid lobbyists that
represent corporate America. Decades of this intensely self-
motivated lobbying have made America the best place to start and
run a business in the entire world.
These tax rules provide amazing benefits to the business owner.
Here are just a few to get you to see why you need to be in the
business of trading.
Advantage #1.
The Business Owner is Given a Blank Check for Deducting Expenses.
All ordinary and necessary business expenses come off the top.
That is why corporations can make millions if not billions, and
not have to pay any taxes. Other than a retirement plan, this is
the most profitable way for a trader to slash their taxes. Most
traders can find $15,000 to $25,000 of expenses that they can
attribute to their trading business every year.
Advantage #2.
Trading Losses Can Be Applied to Previously Filed Tax Returns!
If you select the right accounting method in your trading
business, losses can apply to previously filed tax returns. This
is one secret to how Joe the Hobbyist could have avoided a large
part of his misery. His losses of 2000-2002 could have allowed
him to re-file his 1999 return and cancel out his tax bill, if he
had been trading as a business.
Advantage #3.
The Part-Time Trader Can Offset His Personal Taxes with Trading
Expenses.
The part-time trader can offset his W-2 paychecks with business
tax breaks (losses, expenses, start-up costs) from his trading
business. This may seem shocking, but the IRS wants to help you
start your trading business! You are given the ability to reduce
your taxes on your personal income, and divert that money into
your trading business!
With a trading business, you will be able to convert personal
expenditures into business deductions and potentially save
thousands of dollars a year in Federal and State income taxes.
The main challenge for you is will be to adequately certify that
you are indeed operating a trading business, and avoid the
limiting Hobbyist designation that devastated our friend Joe.
Are You An Employee With a Hobby, or a Business Owner With a
Plan?
The advantages of being a business owner are tremendous. If you
are in business for yourself you will be given the greatest
opportunities for building and keeping your wealth. The good news
is that you, as a trader, whether you trade full-time or part-
time, have the ability to treat your trading as a business.
The key is to get proper, timely advice on exactly what to do,
and then do it. You will know you are doing it right, when you
can be asked, “What are you up to?” and not even have to think
before giving your answer.
Dave Fleck, CPA is the Tax Director of Traders Accounting. For
the Special Report: What the IRS Isn’t Telling You About Trader
Taxation, go to:
http://www.tradersaccounting.com/a.pl?tax&1026&cut.asp
By: Dave Fleck, CPA
Traders Accounting
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